As a result of the current pandemic, many charities have had to cancel events. Not only may they have already spent considerable sums of money on organising and publicising these events but, in many cases, they will have been relying on the income they would have generated to provide funding for their work. HMRC have just announced a welcome temporary change to the Gift Aid rules for processing refunds, which will unlock further much needed tax relief for charities, but it does not appear to apply where events are postponed.
What is the issue?
By way of background, in addition to imposing a number of specific conditions, the legislation governing Gift Aid provides that is only available for a gift consisting of a ‘payment of a sum of money’. HMRC's general guidance makes it clear what does, and what does not qualify (where the new guidance does not itself apply).
In particular, paragraph 3.4.4 provides that:
'A donation must be a payment of a sum of money. A donation cannot be made in kind, by loan waiver or by debt/loan conversion.'
Until the most recent guidance there had been concern that, where an event was cancelled and the charity asked a ticketholder to waive repayment of the ticket price, this was, on the face of it, a waiver of a debt so that Gift Aid was not available.
Historically, the advice had always been that, where a donor wished Gift Aid to be available when waiving the repayment of any money due from a charity, it was important to ensure that two separate steps were taken: first, the charity should repay the donor the money due; and, secondly, the donor should make a donation to the charity.
New guidance on cancellation of events
On 19 March, the Chairman of the Charity Tax Group, of which Withers is a member, wrote to the Chancellor proposing that:
'On an exceptional basis, for the duration of the coronavirus crisis, HMRC should allow Gift Aid to be eligible on any refund donated to charities in lieu of cancelled tickets or debts not to be collected. While Gift Aid would not ordinarily be eligible on such gifts this would help to recognise the generosity of the British public and incentivise them to not seek refunds from charities, which are already struggling with cashflow issues. The amount being gifted is clearly a donation and freely given and no benefit is being granted to them as the event has been cancelled. There is precedence for such a mechanism through the Retail Gift Aid scheme and this would be a quick and effective measure in support of charities and donors.'
On 30 March, in response to a parliamentary question asked by Lord Smith of Finsbury (Chris Smith, the former Secretary of State for Culture, Media and Sport in the Blair Government), Lord Agnew of Oulton replied on behalf of the Government that:
'Theatres and other cultural venues… can claim Gift Aid on the value of tickets for cancelled events if the patrons have agreed not to be refunded for the cost of the ticket and agree for the same amount to be treated as a donation….'
Lord Oulton also made the obvious points that charities would have to make sure that they had obtained a valid Gift Aid declaration and that the donor had paid sufficient tax to cover the tax to be reclaimed by the charity from HMRC.
On 16 April HMRC then published the guidance referred to above, confirming that the government will allow Gift Aid to be applied to all donations made of amounts equal to the price of tickets for events cancelled because of COVID-19. So long as it complies with the guidance, the charity will no longer have to go through the process of refunding the ticket price with the individual then donating it back.
Charities wishing to take advantage of this relaxation of the rules must follow the following process:
- contact the individual who previously purchased the tickets for the cancelled event;
- explain that the individual is entitled to a refund but may wish to donate the cost of the ticket to the charity;
- make it clear that the individual does not have to donate the refund but, if they choose to donate it, it is non-refundable;
- make sure the individual has paid, or will pay, enough tax to cover the donation in the relevant tax year;
- document the conversation with the individual and keep records of this; and
- ensure that there is a Gift Aid declaration in place for the individual
Some points about Gift Aid
Here it is worth making some basic points about Gift Aid. If a donor wants a charity to keep the entirety of a ticket priced at £80, and Gift Aid is available, the Charity will be able to reclaim £20 from HMRC. If the donor is a basic rate taxpayer and has not made too many Gift Aided donations (neither of which should be assumed), he or she will have no further tax to reclaim or pay in relation to the gift: although the charity now has £100, not the £80 ticket price, it has still cost the donor £80.
However, if the donor has paid insufficient tax to cover all the tax to be reclaimed on the gifts he or she has made in the relevant tax year, the donor can be assessed to tax in a sum equal to the tax recovered under Gift Aid but which he or she has not paid. Whilst this may be thought an unlikely outcome for small value tickets, it may be of more concern where the ticket price is higher or the donor has waived refunds for a number of different events (particularly if they have made other substantial charitable donations).
If the donor is a higher or additional rate taxpayer, he or she is able to claim further tax relief so that the net cost to him or her becomes the amount he or she would have had after paying tax at the relevant marginal rate; on an £80 ticket, £60 or £55. Here there is a real benefit to the donor as well as the charity.
If donors are to be asked to consider waiving ticket refunds so that Gift Aid can be claimed, it will be important to consider (and be willing to discuss) these issues. Pointing out the advantages to the donor may help secure the extra 20%, and no donor (with whom you will no doubt wish to maintain relationships for the future) will thank you for having walked them into a tax liability. Also, bear in mind that Gift Aid declarations can be made orally but must contain certain information (see the HMRC guidance referred to above).
To what does the new guidance not apply?
There is no stated time limit specifying how long the changes will be in place, however the guidance describes them as 'temporary'. The position currently appears to be quite straightforward while social distancing measures make events impossible to hold. However in future, when social distancing measures have been relaxed, events may still be cancelled due to the knock on effects of coronavirus. Whether these temporary changes will still apply in these circumstances remains to be seen.
Finally, the guidance clearly states that the temporary changes only apply to events which have been cancelled due to the coronavirus. Events which have been postponed are not eligible. So what is the position if the new date for the event does not suit the purchaser?
There are two points here: first, is the charity entitled to change the date under the terms of its contract with the purchaser? If so, it will need to consider (and document) why it considers it in its interests to give a refund rather than make the purchaser accept the new date – one obvious consideration may be the likely impact of such a course of action on the purchaser's further support for the charity.
Secondly, if the purchaser is entitled to, or is to be given, a refund but is still willing to donate the price of the ticket, it would appear that the charity will have to revert to the process described above whereby, instead of agreeing a waiver of repayment, the charity actually repays the money due in the hope (but not the certainty) that the purchaser will then make a separate Gift Aided donation of money to it. And the possibility that the separate donation will not actually be made will, of course, be another factor which the Charity will need to take into account when considering whether it should offer a refund for a postponed event when it has no legal obligation to do so.
